The FDR Framework is the backbone for a 21st century financial system. Under this framework, governments ensure that every market participant has access to all the useful, relevant information in an appropriate, timely manner. Market participants have an incentive to analyze this data because they are responsible for all gains and losses.

Thursday, February 3, 2011

Are Hedge Funds Missing the Opportunity to See Wall Street's Positions?

The hedge fund industry is on the verge of missing an opportunity to make a significant amount of money. As reported by the Wall Street Journal, the hedge fund industry is getting ready to fight disclosure.

Hedge funds are gearing up to take on proposed rules that would force them to turn over more data about their trading positions to the U.S. government.

... "We always have a concern about having our name attached to a particular portfolio position or particular strategy," said David Rubenstein, the chief financial officer and general counsel of BlueMountain Capital Management LLC, which has $4 billion under management. "If it were disseminated publicly, it could come back to hurt us or hurt the market as a whole."

As regular readers of this blog know (see here), this argument is the one put forth by Warren Buffett to justify not disclosing changes in his portfolio in a timely manner.

Others, including the Managed Funds Association, a Washington hedge-fund lobbying group, said they aren't fighting what regulators are asking from private funds, as long as they "keep that information confidential," said Stuart Kaswell, the association's general counsel.

... The rules have been expected, and many in the industry have felt that it was unavoidable or necessary to help regulators detect market trouble spots.

Under current rules, many managers are required each quarter to publicly disclose their long equity positions in public securities. The proposed rules would require a much greater level of disclosure to regulators about trading positions, counterparties, liquidity, leverage and performance. Regulators would be required to keep the new disclosures confidential.

Why should the information be kept confidential? Wouldn't it be useful if all market participants could access this data and analyze it for potential risks?

What if every market participant had to disclose their positions? Wouldn't the hedge funds like to know what positions Goldman Sachs and the rest of Wall Street have?

Think of the money to be made by hedge funds having Wall Street's positions.

Instead of fighting disclosure, the hedge funds should champion disclosure and insist that Wall Street also disclose its positions by providing current asset-level disclosure.

About this blog

A blog on all things about Wall Street, global finance and any attempt to regulate it. In short, the future of banking and the global financial system.

This blog will be used to discuss and debate issues not just for specialists, but for anyone who cares about creating good policies in these areas.

At the heart of this blog is the FDR Framework which uses 21st century information technology to combine a philosophy of disclosure with the practice of caveat emptor (buyer beware).

Under the FDR Framework, governments are responsible for ensuring that all market participants have access to all the useful, relevant information in an appropriate, timely manner. Market participants have an incentive to use this data because under caveat emptor they are responsible for all gains and losses on their investments; in short, Trust but Verify.

This blog uses the FDR Framework to explain the cause of the financial crisis and to evaluate financial reforms like the ABS Data Warehouse.